Fund Accounting for Churches and
Non-Profits
What is fund accounting?
Most churches and nonprofits use fund accounting. It
is an accounting method that groups assets and liabilities according to
the specific purpose for which they are to be used. It helps to keep
restricted (special) and unrestricted (general) funds separate.
What is its main purpose?
The main purpose is stewardship of financial
resources received and expended in compliance with legal or other
requirements.
What is stewardship?
Stewardship is a responsibility to take care of
another person's property or financial affairs.
Why should churches and
nonprofits utilize this method of accounting?
Because with fund accounting,
accountability is measured instead of profitability.
Financial reports are directed toward contributors, church
members, or the church/nonprofit's governing body, who are
more concerned with having adequate fund balances to carry
on services provided rather than seeking a profit on
investments as investors do.
In fund accounting, funds are set up to
provide reporting of expenditures for designated purposes.
How do you set it up?
You must be able to produce reports that
can detail expenditures and revenues for multiple funds.
Profit oriented businesses only have one
set of self-balancing accounts or general ledger. However,
churches and nonprofits can have more than one general
ledger depending on their need.
For example...you may have one general
ledger account titled "General Fund" which all unrestricted
funds pass through.
Then you may have several more general
ledger accounts titled "Missions", "Building Fund",
"Vacation Bible School", etc. which restricted funds pass
through. These are funds that are set aside for a specific
purpose.
Treasurers or finance administrators may
think that the best way to handle restricted funds is to
open a separate checking account for each fund.
This approach multiplies paperwork and
makes determination of a balance sheet much more difficult.
All funds can be placed in one bank
account as long as the accounting system clearly documents
net assets and liabilities in each fund apart from
operational cash flow.
Also...you must be able to produce
reports that summarize the financial activities of the
church or nonprofit with all of your funds.
You can set your church or nonprofit
accounting up on paper, in spreadsheets, As Featured On
Ezine Articlesor through a church or fund accounting
software. No matter how you choose to set it up...it is very
important that your financial administrators understand the
underlying concepts of fund accounting and accurate
financial statement preparation.
